The Philippine SEC’s Phantasm of “Trading Gangs”

Below is an example of Hayek's Fatal Conceit applied to the Philippines

From the Business Mirror,

The Securities and Exchange Commission (SEC) is studying new surveillance initiatives that may see the establishment of a special division to monitor online chatter targeting so-called trading gangs, SEC Commissioner Juanita Cueto said on Thursday.

Trading gangs, according to Cueto are loosely defined as short-term trader syndicates who have both the resources and numbers to drive market prices and volumes.

She added that the trading rings that “play” the market are nothing new in the country or even abroad, but she noted that their influence had been growing in recent years, aided by the anonymity offered by the Internet and the influx of new and relatively inexperienced investors who may fall prey to these groups.

“They have pseudo names on the Internet. The scary part is they buy and sell in unison. Some of their analyses are inaccurate and can hurt issuers,” Cueto told the BusinessMirror. “It is a concern of legitimate brokers and issuers.”

She said the surveillance measures could involve closer scrutiny of Internet-based stock-market forums.

Some people cheer at this development WITHOUT an inkling of understanding HOW the SEC will be able to define and enforce surveillance of the so called "short term trader syndicates" that “have both the resources and numbers to drive market prices and volumes” from so-called trading gangs.

At what criterion will groups of people (syndicates) who shares “beliefs” in certain stocks, even in the short term, whom they are or could be exposed to, culpable of “driving” market prices and volumes? What if the stocks they promote indeed goes up? 

If a prediction fails, does this mechanically imply fraud?

In bear markets, does allegations of “pump and dump” proliferate or even exist at all?

Importantly what delineates “belief” and “analysis” from the intent to “defraud” through manipulation?

So the implication is that such regulations will be arbitrarily defined or established according to the whims of the political masters.

People who espouse political intrusions have a strange mystic adulation for the supposed omniscience of authorities and of the platonic ethics of regulators.

Yet if this logic holds true, then markets DO NOT need to exist at all.

Áll such ruckus essentially boils down to the definition of prices and values.

Who determines what appropriate prices and values are? The SEC? From what basis?

For starters, market prices are ALWAYS subjectively determined

To quote the great Ludwig von Mises,

It is ultimately always the subjective value judgments of individuals that determine the formation of prices. Catallactics in conceiving the pricing process necessarily reverts to the fundamental category of action, the preference given to a over b. In view of popular errors it is expedient to emphasize that catallactics deals with the real prices as they are paid in definite transactions and not with imaginary prices. The concept of final prices is merely a mental tool for the grasp of a particular problem, the emergence of entrepreneurial profit and loss.

Prices, which are subjective expressions of people’s value scales and time preferences, are principally used for economic calculations from where trades (of all kinds including stock markets) emerge, again Professor Mises

In the market society there are money prices. Economic calculation is calculation in terms of money prices. The various quantities of goods and services enter into this calculation with the amount of money for which they are bought and sold on the market or for which they could prospectively be bought and sold. It is a fictitious assumption that an isolated self-sufficient individual or the general manager of a socialist system, i.e., a system in which there is no market for means of production, could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket system.

So if prices are subjectively determined, how then does the "gods" of the SEC know each and every individuals order of priorities?

And at what levels are prices to be considered “fair”?

Again Professor Mises,

The concept of a "just" or "fair" price is devoid of any scientific meaning; it is a disguise for wishes, a striving for a state of affairs different from reality. Market prices are entirely determined by the value judgments of men as they really act.

So supposed fraud will be substituted for propaganda and the curtailment of civil liberties.

This comment by a market practitioner from the same article “It could be really hard to prove wrongdoing this way,” is half correct, but has been obscured by the misleading reference of “noting how identities can be masked online”.

“Anonymity” does not automatically make stock promotions unethical. What makes unethical is the deliberate act to defraud or bamboozle people, e.g. a breach of contract or deprivation of property rights, which based on the above seems very difficult to prove.

This would be analogical to say that advertising is a fraud.

To which government providing “truth” in advertising is likewise delusional, Professor Ludwig von Mises writes,

But whoever is ready to grant to the government this power would be inconsistent if he objected to the demand to submit the statements of churches and sects to the same examination. Freedom is indivisible. As soon as one starts to restrict it, one enters upon a decline on which it is difficult to stop. If one assigns to the government the task of making truth prevail in the advertising of perfumes and toothpaste, one cannot contest it the right to look after truth in the more important matters of religion, philosophy, and social ideology.

And government interventions DO NOT make transactions ethical too, on the contrary, they make them worst.

Bruce L Benson in “The Enterprise of Law: Justice Without the State” writes, (bold emphasis mine) 

When government becomes involved in the enterprise of law, both the rules of conduct and the institutions for enforcement are likely to change. The primary functions of governments are to act as a mechanism to take wealth from some and transfer it to others, and to discriminate among groups on the basis of their relative power in order to determine who gains and who loses.

Yes most people don’t seem to realize that in an inflationary boom, the guiding incentives provided by manipulation of interest rates promote rampant gambling and irresponsible actions which are always blamed on market actors.

From the great Henry Hazlitt

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

Non-Austrian Charles Kindleberger author of Mania’s Panics and Crashes also notes how swindles emerge during bubble cycles. (Previously I quoted him here)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

And as proof, I cited instances of Ponzi schemes in the US has had meaningful correlations with the FED’s credit easing policies.

When political gods determine winners and losers, contrary to popular brainwashed expectations, the outcome is not one of optimism. According to author, philosopher and individualist Ayn Rand on her classic novel Atlas Shrugged,

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

Such interventionism also leads to a suppression of freedom of expression.

Nonetheless, sorry to say but regulations will not solve or protect people form their silliness or foolishness, their reckless behavior and the entitlement mentality which most likely has been a result of existing policies…instead these would only do worse.

And in contrast, as I previously noted, successful investing requires Self discipline.

Investing Lessons: Sir John Templeton’s 16 Rules For Investment Success

Precious investing lessons from the legendary investor Sir John Templeton's 16 Rules for Investing Success

1. Invest for maximum total real return 

2. Invest — Don’t trade or speculate 

3. Remain flexible and open minded about types of investment 

4. Buy Low 

5. When buying stocks, search for bargains among quality stocks. 

6. Buy value, not market trends or the economic outlook 

7. Diversify. In stocks and bonds, as in much else, there is safety in numbers 

8. Do your homework or hire wise experts to help you 

9. Aggressively monitor your investments 

10. Don’t Panic 

11. Learn from your mistakes 

12. Begin with a Prayer 

13. Outperforming the market is a difficult task 

14. An investor who has all the answers doesn’t even understand all the questions 

15. There’s no free lunch 

16. Do not be fearful or negative too often 

Sir Templeton gives an explanation for each

1. Invest for maximum total real return 

This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped. It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities. Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years. If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes

For the rest, read them at FranklinTempleton.com

My comment:  

Most of John Templeton's investing tips signify as common sense and self-discipline which should be used by any "serious" investors. I say serious because some people dip their hands on the markets for other reasons than just profits, e.g. ego trip, social desirability bias and etc...

However when dealing with "quality, value, bargain, buy low" these ultimately depends on the operating environment, which in the past had been "conventional". 

Today, we are in unprecedented and uncharted territory when it comes to inflationism and interventionism that has massively distorted and obscured price signals of the marketplace.

In other words, conventional rules may not apply under the current setting which means go back to rule number 3--remain flexible and open minded.

Weather Forecasters are Better Forecasters than Stock Market Experts

Weather forecasters are said to have markedly better batting average making predictions or are far more accurate prognosticators than most stock market experts. (Well this applies to foreign private weather forecasters and not the Philippine government counterpart.)

Justin Rohrlich at the Minyanville writes,

According to New York Times statistical wunderkind Nate Silver, the National Hurricane Center’s accuracy has improved 250% over the last 25 years.

More accurate weather predictions benefit the economy, boosting the efficiency of businesses like FedEx (FDX), which employs 15 in-house meteorologists, as well as companies working offshore, like BP (BP) and Transocean (RIG). Weather is such an important factor in financial markets that Goldman Sachs (GS) employs staff meteorologists, as do Citigroup (C) andJPMorgan Chase (JPM).

While meteorologists have improved, other analysts -- specifically financial ones – are still off the mark more often than not.

“In November 2007, economists in the Survey of Professional Forecasters -- examining some 45,000 economic-data series -- foresaw less than a 1-in-500 chance of an economic meltdown as severe as the one that would begin one month later,” Silver writes.

“Why are weather forecasters succeeding when other predictors fail? It’s because long ago they came to accept the imperfections in their knowledge. That helped them understand that even the most sophisticated computers, combing through seemingly limitless data, are painfully ill equipped to predict something as dynamic as weather all by themselves. So as fields like economics began relying more on Big Data, meteorologists recognized that data on its own isn’t enough.”

So the admission of the knowledge problem is one crucial factor contributing to the weather forecaster’s edge.

I’d add that the unwillingness to think outside the box has been another key variable to why stock market experts underperform.

More…

In a slightly larger than usual nutshell, the crux of the issue was this: Weather forecasters have an “awareness of uncertainty” about the natural world that “causes these experts to manifest a lower overconfidence effect than experts from the other domain.”…

Further, financial analysts were also found to be unwilling or unable to be self-critical after a failure -- something that Raymond Dacey, Professor of Finance and of Statistics and Adjunct Professor of Philosophy at the University of Idaho, suggested to the authors “could pertain to the clients.”

Simply put, the “Disposition Effect” has to do with risk attitude and what Shefrin and Statman colloquially term “get-evenitis” -- an aversion to loss realization.

Another major obstacle is the overconfidence bias

I’d add that egotism has always been a hurdle to self discipline.

Here is a relevant investment ‘war’ tip from Sun Tzu’s Art of War

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle

Online Scammers: Sophistication in Stupidity

Online fraud like the Nigerian Email Scam has been a growing billion industry, where victims has reportedly lost a hefty $9.3 billion in 2009 which has been up from $6.3 billion the year before.

Yet scammers ‘specialize’ on their predation, as their ‘marketing’ activities focus on duping on the most vulnerable of the society.

From the Wall Street Journal, (bold emphasis mine)

So why do the scammers persist in blanketing the world with outlandish propositions, announcing that they are from the very country whose name has become synonymous with online fraud?

Cormac Herley, a computer scientist at Microsoft Research who specializes in security issues, provides a convincing answer in a paper presented at a conference in Berlin and recently published on his website. In it, he analyzes the con mathematically, using an approach called signal detection theory. His crucial insight is to look at the situation not from the victim's point of view but from that of the scammers. Their challenge is to hook only people who will get sucked in deeply enough to send a significant amount of money—the "true positives." They must minimize the effort they devote to "false positives" (targets who might seem like dupes but are suspicious and/or never pay up).

It costs the scammers virtually nothing to spam the world, but it costs them a lot (especially in terms of time) to conduct all the follow-ups necessary to reel a sucker all the way in. The people behind "Captain Mbote" spent six months pursuing their quarry before he started wiring money to them.

A proposal offering a more realistic scenario might generate more replies, but most of them wouldn't pan out. The effort of sorting through them to find the real suckers would undermine the scheme's profitability. Instead, by screaming "This is another absurd instance of the familiar Nigerian scam," the fraudsters are filtering out what to them is spam—responses from suspicious people they don't want to deal with—and "letting through" only those most likely to play along. The fewer potential victims in the world, the more precisely the scammers must target them, and thus the more absurd and easy-to-spot the attacks should be.

The Nigerian scammers aren't alone in using this approach. Phishing attacks, like the urgent emails from the "IT Support Team" requesting our passwords to avert some Internet calamity, are so hackneyed that they likely ensnare only the extremely naive or credulous.

Mr. Herley's analysis of the Nigerian scam suggests a counterintuitive way to fight back. Most efforts to reduce Internet fraud focus on reducing the number of people who reply to scammers—by educating users or by filtering out the scam emails. But some attacks inevitably slip through, and some Internet neophytes inevitably fall prey.

A more effective solution, Mr. Herley suggests, would require considering the goal of the scammers. Increasing the number of responses to their emails, he shows, can reduce profits, as long as those responses come from people who never send money. Such "scam baiters" already exist (the community website "419 Eater," named after the Nigerian law that governs fraud, offers tips and support). The more scam baiters, the lower the average return to the scammers on each attack and the less incentive they have to continue the scam.

Perhaps clever artificial intelligence researchers could create automated scam-baiter bots that would simulate gullible victims, drawing out the interaction as long as possible. The most convincing victim-bot would possess sophisticated knowledge of how the scammers think and behave—precisely the knowledge that tends to elude us when we look at the world only from our own perspective. Similarly, the profitability of phishing scams could be reduced by sending bogus account numbers and other data back to the scammers.

As Mr. Herley's paper shows, what seems stupid can actually be quite sophisticated. It's only by imagining the situation with the roles reversed that we can see what we've been missing.

The growing size of the illicit industry accounts for a sad state of societal affairs which means there have been that big a number of precision targets or "suckers" in the world.

Yet “something out of nothing” has been the basic trap laid out by scammers for unsuspecting victims.

Ironically, “something out of nothing” is the same principle that undergirds politics—only that they come in the jargon of “free lunch” or the “Santa Claus fund”.

The difference is that politics has been rationalized as having to provide the services of “public goods” whereas online scams have been outright frauds.

My guess is that these two may have important causal connections; personal responsibilities may have likely been relinquished for the dependence on the welfare state, making many people vulnerable and highly sensitive to predation.

Nevertheless, knowing what you are getting into, understanding that there is no such thing as a free lunch, critical thinking, conducting research to self-educate, and importantly, self discipline will always serve as the best insurance against fraud of any kind—online scammers, stock market (e.g. boiler rooms), Ponzi schemes and etc., and most importantly, against political tomfoolery.

Brain Damage and Better Investment Decisions

Jason Zweig in his latest article at the Wall Street Journal cites a study which suggests that people with brain damage are likely to make superior investment decisions than normal people…

With computerized traders that "hold" stocks for only a few seconds at a time and markets that can swing wildly in a matter of moments, long-term investing seems to be on the verge of extinction.

Perhaps this is inevitable. It turns out that short-term thinking is deeply embedded in the workings of the human brain. New research suggests that in order to avoid trading your accounts to death, you must counteract some of the very tendencies that make Homo sapiens the most intelligent of all species.

In a study published last month in the Journal of Neuroscience, researchers from California Institute of Technology, New York University and the University of Iowa looked at how people use past rewards to predict future payoffs.

Directly behind your forehead is a region of the brain known as the frontopolar cortex. Much larger in humans than in other primates, this area is critical to such advanced mental functions as memory, exploring new environments and making decisions about the future.

In the new study, the researchers wanted to see how the frontopolar cortex contributes to predicting rewards. So they compared people with damage to the frontopolar cortex against two control groups of healthy people and those with injuries elsewhere in the brain (but not the frontopolar cortex)….

When confronted with the unpredictable, however, the frontopolar cortex refuses to admit defeat. It draws on all your computational abilities to search for patterns in random data.

In the absence of real patterns, it will detect illusory ones. And it will prompt you to act on them.

No wonder so many investors find it hard to muster the willpower to buy and hold a handful of investments for years at a time.

But if "buy and hold is dead," as growing numbers of investors argue, it isn't clear what else is alive. In the lousy markets of the past decade, various alternatives such as "tactical asset allocation" (or market timing), mathematical risk-reduction techniques and even plain old intuition haven't worked out all that well, either.

Most of the folks who say buy and hold is dead don't talk much about their long-term returns. Instead, they stress how they have done recently, a tactic that for many potential clients has the same irresistible appeal as the last couple of pulls on a slot machine.

The solution to short-term thinking isn't to bash yourself in the forehead with a hammer, of course. But you can use your brainpower to your advantage.

Every investing decision you make should be the result of a deliberate process.

The implication that it would take brain damage to make for a better investor would seem downright preposterous (the same goes with the theory of high IQs)

Pseudo scientific studies like the above disparages the individual’s distinctive capacity to deal with the ever changing circumstances we are faced with.

While it may be true that many people have the tendency to fall for cognitive biases, in reality all of people’s actions are driven by incentives

Incentives are shaped by the dynamic admixture of many factors—including genes and the environment, peer pressure and social status, educational background, culture, religion, technology and even to social policies such as zero bound rates—in relation to changes to the environment, social relations and the economy (even if some of their actions can be read as cognitive biases or heuristics—pattern seeking behavior).

This applies to short-term thinking.

Deliberate process is more about containing the urge for the dopamine to govern one’s action, or importantly, managing emotions through emotional intelligence (EI) to attain self-discipline.

Superior investing decisions can be attained even if you have a normal brain.

Risk ON Risk OFF is Synonym of The Boom Bust Cycle

Prices are relative: high prices may go higher, while low prices may go lower.

The accretion of price actions is what constitutes a trend. Trends can be seen in a time variant lens: intraday, day, weekly, monthly, yearly or decades.

A bullmarket is when the dominant or major trend is up, while the opposite, a bearmarket is when the major trend is down. A market in consolidation means neither the bulls nor the bears get the dominance.

Yet price trends can be seen in many ways depending on reference points. Having said so, people can make biased and deceptive claims by the manipulating the frame of the trend’s reference points to uphold their perspective.

Meanwhile inflection points extrapolate to a reversal of trends which may allude to major or minor trends.

The actions over the past two weeks may yet be seen as normal correction. That is what I hope it is. But I can’t vouch for this.

We Have Met The Enemy And He Is Us

Yet relying on hope can be a very dangerous proposition. As a popular Wall Street maxim goes, bear markets descends on a ladder of hope. While I am not saying we are in a bear market, it pays to understand that quintessentially “hope” represents the basic shortcoming of vulnerable market participants.

Managing emotional intelligence or having a street smart-commonsensical approach, or prudence is a better a part of valor is my preferred option in dealing with today’s torturous bubble plagued markets[1]. There are times that require valiance, however, I don’t see this as applicable today yet.

As an aside, in testy times as these, market participants should learn how to control their emotions or temperaments so as to prevent blaming somebody else for one’s mistakes, and learn how to take responsibility for their own actions. Self-discipline should be the elementary trait for any investors[2].

Regrets should be set aside for real actions. This means that we can opt to buy, sell or hold, depending on our risk tolerance, time orientation and perception of the conditions of the markets. People forget that holding is in itself an action, because this represents a choice—a means to an end.

And because the average person are mostly afflicted by the heuristic of loss aversion[3] or the tendency to strongly prefer avoiding losses to acquiring gain, in reality since a loss taken signifies an acknowledgement of mistakes, the pain from such admission leads to one to take on more risks that leads to more losses, than to avoiding losses.

As American financial historian, economist, author and educator Peter Bernstein wrote[4],

When the choice involves losses, we are risk-seekers, not risk averse.

Egos, hence, play a big role in shaping our trading, investing or speculative positions.

To borrow comic strip cartoon character Pogo most famous line[5]

We have met the enemy and he is us

The Essence of Risk ON Risk OFF Moments

Nevertheless current developments continue to reinforce my perspective of the markets.

1. Despite all the recent hype about local developments driving the local market, external factors has remained as the prime mover or influence in establishing Phisix price trend. This has been true since 2003. Remember, the Philippine President even piggybacked on this[6]

The good thing about market selloffs is that this has been unmasking of the delusions of greatness and its corollary, the deflation of many puffed up egos.

This also shows that there has been no decoupling

2. Global financial markets have moved in on a Risk On or Risk Off fashion.

While the degree of performances may differ, actions in the global financial markets today have shown increasingly tight correlations. The general trend direction and even the undulations of the Phisix, the US S&P 500, the European Stox 50 and the Dow Jones Asia Pacific index over past 3 years have shown increased degree of conformity.

Risk ON moments are mostly characterized by greater appetite for speculative actions as seen in the correlated upside movements of prices of corporate bonds, equities, commodities, and ex-US dollar currencies.

On the other hand, Risk OFF episodes or risk-averse moments like today, have accounted for “across the board selloffs” a flight to safety shift to the US dollar and US treasuries.

There has been little variance in price trends that merits so-called portfolio diversification. As pointed out before these have been signs of “broken”[7] or highly distorted financial markets.

Observe that whether the actions WITHIN the Philippine Stock Exchange, or among major developed and emerging market bellwethers or the other asset markets, current market trends produces the same Risk ON-Risk OFF patterns.

A dramatic upside move during the first four months only to be substantially reduced this month exhibits little evidence of conventional wisdom at work. Neither earnings can adequately explain the excessive gyrations in market fluctuations nor has contemporary economics.

Risk ON and Risk OFF, are in reality mainstream’s euphemism for boom bust cycles, which have been caused by inflationism and various forms of interventions—that has engendered outsized volatility in price actions.

Knightean Uncertainty: Greece Exit, China Slowdown and Fed’s End Program Volatility

As pointed out last week, there have been three major forces that have been instrumental in contributing to the recent distress being endured by global financial markets, particularly, the SEEN factor: Greece and the Euro crisis, the UNSEEN factors—China’s slowdown (or an ongoing bust???) and anxieties over US monetary policies.

Since risks implies of measured probability of future events while uncertainty refers to the incalculable probability of future events[8], current events suggests of GREATER uncertainty than of the average risk environment.

For the third time in 6 months, the People’s Bank of China (PBoC) last week cut reserve requirements[9], yet the Shanghai index ignored the credit easing measures and posted a significant weekly loss.

Moreover, the economic slowdown in China has hardly abated.

China’s four biggest banks reported almost zero growth of net lending over the past two weeks[10].

In addition, according to a study by made by a think tank affiliated with PRC’s state council, the estimated the debt-to-asset ratio[11] of Chinese state and private companies, as well as individuals, has reached about 105.4 percent, the highest among 20 countries.

These represent the increasing likelihood of the unwinding of China’s unsustainable bubble. For the moment China’s authorities seems to be in a quandary as they have implemented half-hearted measures which her domestic markets appear to have taken in blase.

Yet if the economy does sharply deteriorate, I would expect more forceful policies to be put in place. So far this has not been the case.

It has been no different in the Euroland where politics have posed as an obstacle to further interventions from the European Central Bank (ECB)

The risks of a Greece exit from the Eurozone seem to have been intensifying. This has been evidenced by the open acknowledgement by Mario Draghi, European Central Bank president, that Greece could leave the Euro. The ECB has even halted to provide loans to four Greek banks[12].

Lending to banks in Greece, which has been experiencing slow-mo bank runs but seem to be escalating over the last week on fears of massive devaluation from the return to the drachma[13], are presently being funded by the national central bank of Greece[14] via the Emergency Lending Assistance.

While there have been estimates as to the degree of exposures by major banks of several nations on Greece, particularly €155 billion for Germany and France[15], no one can really assess on the psychological impact that would translate to financial losses that may occur once official ties have been disconnected. Even Singapore has reportedly been exposed with “a stunning 60%-plus of GDP tied up in European bank claims” according to Zero Hedge[16].

Add to this undeclared the derivatives exposure on Greek securities at an estimated $90 billion[17], the losses from a full blown contagion can reach trillions to the global banking system.

Thus, the probability looms large that that major central banks would use this as an excuse to justify massive inflationism to protect their respective banking systems.

Again the problem that prevents the ECB from further inflating today has been the uncertain status from the politics of Greece. Since nobody in Greece seems to be in charge, the ECB doesn’t know whom to strike a deal with yet. And perhaps in an attempt to influence Greek politics, as stated above, the ECB has partially cut off funding to some Greece banks.

So this should be another evidence of the interruptions of the money spigots.

But the issue here will be the scale of interventions once the process of the Greece exit is set on motion. This will practically be a race between the market and central bank interventions.

And this is why I believe the markets could be exposed to excessively huge volatility during this May to June window, mostly likely with volatility going in both directions, but having more of a downside bias, until the forcefulness of interventions would be enough to temporarily provide patches to malinvestments from becoming evident.

And perhaps in the realization of the risks from financial isolation and the benefits of conditional redistribution from their German hosts, the good news is that the pro-austerity or the pro-bailout camp appears to be gaining ground.

Recent polls seem to suggest that pro-bailouts as having a slight edge[18] or are in dead heat[19] with former favorites, the anti-austerity camp.

The term austerity has been deliberately contorted by the neoliberals. In reality there has been NO real[20] austerity[21] in the Eurozone as government spending (whether nominal, real or debt to gdp) has hardly been reduced. What has been happening has been more of tax increases with little reforms on the labor market or on the regulatory front to make these economies competitive[22][23].

Finally, compounded by external developments, US markets are likewise being buffeted by the uncertainty towards the Fed’s monetary policies where each time the FED ended their easing measures, downside volatility follows.

This was the case for QE 1 and QE 2, and apparently with the closing of OPERATION TWIST this June, US markets have become volatile again.

And as the US markets has recently sagged, the Federal Market Open Committee (FOMC) once again has signaled that they are open to more credit easing measures using the Euro crisis and the US government budget and or debt-ceiling issues[24] as pretext.

The so-called Bush Tax cuts which is set to expire at the end of the year, will translate to a broad increase in tax rates for all[25], will also be a part of the economic issue. Tax increases in a fragile economy heightens a risk of a downturn, and this will likely be met with more easing policies.

Bottomline: The major issues driving the markets has been about the feedback loop between the markets and inflationism (bubble cycles).

Lethargic prices of financial assets have accounted for as symptoms of the artificiality of price levels set by the governments and major central banks through credit easing programs and zero bound interest rates meant to protect the banking system that has been integral to the current political structures which includes the welfare-warfare state and central banking.

In short, falling markets are simply signs of pricked bubbles.

Outside additional support from central banks, asset prices have been weakening, supported by some episodes of debt liquidations, particularly in the Eurozone and in China.

Currently the PBoC, ECB or the FED appear to be constrained or reluctant to pursue with further aggressive interventions for one reason or another. As previously noted, the BoE has officially put to a halt their QE[26].

It could be that they may be waiting for more downside volatility, which should provide them political cover for such action. Also the unresolved political problems of Greece have been an impediment.

So yes, today’s markets have still principally been driven by the ON and OFF steroids or inflationism from central bankers and will continue to do so until markets or politics forces them to cease.

---

[1] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[2] See Self-Discipline and Understanding Market Drivers as Key to Risk Management, April 2, 2012

[3] Wikipedia.org Loss aversion

[4] Bernstein Peter Against The Gods, The Remarkable Story of Risks, p. 273 John Wiley & Sons

[5] Wikipedia.org "We have met the enemy and he is us." Pogo (comic strip)

[6] See The Message Behind the Phisix Record High May 7, 2012

[7] See “Pump and Dump” Policies Pumps Up Miniature and Grand Bubbles April 30, 2012

[8] See The Fallacies of Inflating Away Debt August 9, 2009

[9] See China Cuts Reserve Requirement May 14, 2012

[10] Businessweek.com/Bloomberg.com Loan Growth Stalled at China’s Biggest Banks, News Says May 15, 2012

[11] Bloomberg.com Chinese Company Debt Is At ‘Alarming Levels,’ Xinhua Says May 17, 2012

[12] See Hot: ECB Holds Loans to Select Greek Banks, ECB’s Draghi Talks Greece Exit May 17, 2012

[13] MSNBC.com Greeks withdraw $894 million in a day: Is this beginning of a run on banks?, May 16, 2012

[14] Brussel’s Blog The slow-motion run on Greece’s banks Financial Times, May 17, 2012

[15] See Greece Exit Estimated Price Tag: €155bn for Germany and France, Possible Trillions for Contagion May 17, 2012

[16] Zero Hedge Why Stability Stalwart Singapore Should Be Seriously Scared If The Feta Is Truly Accompli, May 18, 2012

[17] Zero Hedge, Alasdair Macleod: All Roads In Europe Lead To Gold, May 19, 2012

[18] See Are Greeks turning Pro-Austerity? May 19, 2012

[19] Reuters India Greek election race tightens into dead heat May 20, 2012

[20] See More on the Phony Fiscal Austerity, May 16, 2012

[21] See In Pictures: The Eurozone’s “Austerity” Programs, May 8, 2012

[22] See Choking Labor Regulations: French Edition, May 14, 2012

[23] See Greeks Mount Civil Disobedience, Scorn Taxes, May 16, 2012

[24] Bloomberg.com Several on FOMC Said Easing May Be Needed on Faltering, May 17, 2012

[25] See What to Expect when the Bush Tax Cuts Expire May 19, 2012

[26] See Bank of England Halts QE for Now, May 10, 2012

Learning from the Financial Mistakes of Sports Celebrities

Ron Lieber of the New York Times offers 3 lessons to the financial blunders of sports celebrities (bold highlights mine)

Michael Vick will take the field on Sunday wearing the uniform of the Philadelphia Eagles, who took him in after his imprisonment for helping to run a dogfighting ring.

But thanks to his personal bankruptcy filing after he went to jail, he will also be playing for BMW Financial Services, Dodson Pest Control, Summertime Pool and the Monticello Woods Homeowners Association. They are not sponsors. Instead, they and many others have a claim on his future earnings.

Bankrupt professional athletes are a sad fixture on the sports scene, and Mr. Vick isn’t even alone among quarterbacks who have hit the financially injured reserve list. The former Cleveland Browns star Bernie Kosar and the current New York Jets backup, Mark Brunell, have had their brushes with bankruptcy, too.

Sports stars may or may not mess up more often than the average person who earns a lot of money really fast, but their troubles seem outsize because of their fame and the pathetic schemes they fall for. The stakes are high for football players in particular, since their average professional career lasts just four seasons or so and may leave lingering injuries and the health costs or physical limitations that come with them.

Mr. Vick is the rare athlete who is getting a second chance. His lucrative new contract with the Eagles should allow him to pay all of his creditors in full.

Read the rest here

Mr. Lieber’s lessons can be summed up as: avoiding “questionable schemes” of investments, limiting “outsize financial gestures” or largesse and seeking “professional financial help”

It is true that throwing money to businesses or to financial assets, where insufficiency of knowledge or comprehension to the undertaking dominates, does not represent investments, but gambling.

Also, it takes a lot of introspection to manage the ego. This would be the most difficult part, self-control. As Confucius once said, he who conquers himself is the mightiest warrior.

And lastly, professional help represents an option but not a prerequisite.

That’s because as I have previously stated

financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth…

It would need or take only common sense and self-discipline to observe this rule.

And common sense says that self-education should account for a vital part of the action to achieve self-discipline or emotional intelligence.

Only after financial goals and limitations have been established, is when the need for professional help arises. That’s because carte blanche delegation of personal finances would signify as high risk proposition, for the simple reason that a fund manager’s incentives may not align with those of the client.

Financial Success is a Function of Common Sense and Self Discipline

Some have this misbegotten notion/belief that attaining wealth and fame translates to a state of permanence.

Well it’s not.

This should be a noteworthy example, from yahoo.com (bold emphasis mine)

Patricia Kluge was once known as "the wealthiest divorcee in history." Those days are over. Kluge, who had formerly been married to the late billionaire Paul Kluge, recently filed for bankruptcy protection, citing debts somewhere between $10 million and $50 million and assets between $1 million and $10 million….

We doubt the couple will be out on the street selling pencils anytime soon. Still, Patricia Kluge's present straits represent a remarkable reversal for a woman who, at one time, was one of America's richest and most extravagant socialites. A buzzy article from the AP explains that the Kluges once hosted parties for "royalty, corporate chieftains, celebrities, and literary figures." She lived in a 23,500-square-foot mansion, owned a winery and, by all accounts, lived the good life.

A little too good, as it turned out. Her financial troubles began to pile up during the economic downturn and creditors started seizing her assets in earnest earlier this year. Kluge and her husband had attempted to renegotiate their loans with various banks, but failed. In April, Donald Trump bought most of Kluge's winery and vineyard from Farm Credit Bank for $6.21 million.

As I always tell my wonderful kids, financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth.

So has been the case of Patricia Kluge. And so will be the case for all the rest who fail to heed or realize on this simple lesson.

[Yes, local boxing legend Manny Pacquiao, despite his newfound riches, won’t be spared from this basic rule]

And so has this predicament befallen on governments, whom mistakenly believe that they can spend their way to prosperity.

Bottom line: It would need or take only common sense and self-discipline to observe this rule, which unfortunately many people especially those in the governments and their apologists don’t have (many live under the delusion that they are beyond or immune to the laws of economics. Also the idea that they are equipped with or backed by the printing presses can do them magical stuffs).

Can Governments Be Trusted To Implement Self-Discipline?

If past performance is to be reckoned with, based on the Euro Zone, the answer is NO.

This from Bloomberg, (bold emphasis mine)

``Euro-area governments breached their own fiscal rules more than half of the time since they began trading the single currency, according to data compiled by Bloomberg News.

``With Greece’s debt crisis now exposing the weakness of fiscal oversight in the 16-nation economy, governments missed one or both of the European Union’s two budget requirements 57 percent of the time since they adopted the euro. Those rules limit debt to 60 percent of gross domestic product and budget deficits to 3 percent of GDP, as set out in the 1997 Stability and Growth Pact.

``The pledge by countries to meet their fiscal rules turned out to be “rhetoric rather than reality” and contributed to the debt crisis, David Blanchflower, a Bloomberg News contributor and former Bank of England policy maker, said in an interview from Dartmouth College in Hanover, New Hampshire, where he teaches economics.

``Of the economies that have been in the euro since it started trading in 1999, Belgium and Italy missed one or both of the targets in all 11 years. Greece failed in all nine years in which it used the euro. Finland and Luxembourg satisfied both goals every year."

Read the rest here (hat tip: Professor Antony Mueller)

Here is a Bloomberg interactive graph:

click on the image to direct you to the interactive graph at Bloomberg or click here

As the illustrious Milton Friedman explains about the 4 ways money is spent -where the fourth way is about people spending other people's money on other people,

``In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds." (bold highlights mine)

So in absence of discipline the next recourse is to print money! So who says we're in a crisis?